Property speculation to boom in 2015

The last two years have been somewhat of a testing ground for making property price forecasts informed by my indicator, which has a new name – the Speculation Index. It is the ratio of housing gross yields to mortgage interest rates, and captures the degree of price growth speculation embedded in current prices.

Above is a new long term series of this Index using data compiled by Philip Soos. It offers a number of insights into the history of housing credit, the durability of cycles in periods of apparent macroeconomic stability, and offers a warning about the future of residential property markets to those who hold out hope that maybe now is the beginning of that elusive era of stability.

The primary lesson from the long term Speculative Index is that the easy money era since the late 1960s has been qualitatively similar to the pre-WWII period in terms of cyclical patterns, but far different in terms of scale. Whether this has to do with the openness of credit markets, dual incomes, or the development of private investor markets in Australian housing, it is best to consider this period a unique conflation of institutions that cannot be compared to prior periods.

Or it could just be terrible data. Take your pick.

We can gaze back at the early part of the 20th century, which followed a massive housing boom and slump, particularly in Melbourne, during the 1890s. The first decade, by this measure, was a period of relative stability for property prices in Australia.

After WWI a property boom took hold, peaking around 1921 as yields fell and interest rates crept upwards, and followed by a long slump that continued through the Great Depression. During WWII the market was completely unmoved as resources were sucked out of domestic private markets into the war effort and various administrative controls kept prices and rents steady.

The renowned stability of the 1950s and 1960s is on display in this metric as well, with housing capitalisation rates very stable compared to yields, with almost no price speculation built into prices. Perhaps this was primarily a product of tight credit to households, coordinated construction efforts, and relatively high levels of non-housing investment.

Post 1970 the modern finance era kicked off with a Sydney boom, which rippled across States and was over by about 1974. Then the 1980s saw another round of smaller surges of speculation, ultimately collapsing in 1989 and leading to a recession a few years later. The end of the 1990s recession ended appeared to be the best time to buy property in the past two decades, as this index and a whole host of property-related metrics indicate.

The massive 2000s boom then rippled across the nation, and as interest rates where ratcheted up on falling property yields we see another index peak in 2008, which plunged back in response to substantial stimulatory interest rates cuts.

In essence, housing prices were rescued by the RBA during this period. Historically low mortgage interest rates, the influx of foreign investment into the housing market (and mining) and the Rudd government’s bailout of the banking and financial system saved the day.

As I wrote early last year, my Speculative Index again showed it was an opportune time to buy Australia housing. Prices are up over 10% nationally since, and around 17% in Sydney. Currently this Index suggests there is more to run in the national price cycle. Prices being more likely to rise than fall in the near future.

I add a dashed prediction line to show what might be the next moves in this Index, jointly arising from a number of evolving trends including

Rising mortgage interest rates

Flat or falling rents

Rising prices

For example, if prices rise by 10%, mortgage rates rise by 0.75%, while rents are flat, the Index will shift up to 2.1. That’s still a long way off the type of irrational exuberance we normally see, taking us only halfway from the buy line to the sell line.

Unless we see significant credit controls in the housing market, it is likely we will continue the property price cycle we have just started. This cycle itself will compress yields while rents are stable and result in a surge of the index, providing the boom for necessary for the next bust. The RBA, as usual, will be too late to increase interest rates. Governments at all levels will be too uncoordinated to increase public investment to smooth the transition to a higher rates or tighter credit environment.

If the Georgist 18 year average period of asset cycles has merit, then we are now likely living in a period much like mid 1990s – still cautious from recent experience and ignorant of the property cycle about to get under way. Remember though that this Index does not represent prices, but reflects the degree of speculative fervour in the market. The Index can rise without price price increases if rents are flat and mortgage interest rates are rising. Which of these factors we see play out will determine the scale of the price gains likely to be experienced.

Looking at the history of this index, coupled with the recent success of using its cyclical pattern to predict property market movements, suggests it is unlikely that ‘this time is different’.

Comments

Until risk is put back into borrowing ie: interest rate rise. Most don’t see that happening. I’ll bet very few people,(if any!) saw Russian int erst rates rise from 7% a year ago; 8 % 3 months ago to 17% today. That…is what will put an end to this irrationality…”But A$ interest rates can only fall if we want to help the economy!” Really? We shall see….

“Lower interest rates = good” is bogan logic at its finest. Interest rates being the literal sole measure of economic performance, of course.

Part of the issue is that 25 years of pretty good times results in a really ridiculously cavalier attitude. Me and a mate were playing around with home loan calculators and he made the comment “if anyone applying for a mortgage hasn’t played with this and put it to at least ten percent IR they’re delusional”.

He’s 21 and mows lawns for a living*, yet he has more grounding in reality than investors with years of experience, or even the broader population.

*not to state that profession = intellectual capacity (as profession is more a function of realisation of intellectual capacity)

Yeah the external circumstances of massive sanctions does mark a gigantic difference. The fact Australia is heavily integrated into the global system and isn’t really at risk of being sanctioned for disobeying the US is a pretty major difference.

Russia has a massive problem with capital flight, basically cash leaving the country en masse.

“Theres also the fact that Russia is lawless and corrupt, with a history of violent revolution”

Yep! According to my resident European ‘expert’ this the the essential problem. As a result we have’ ‘capital flight’ from Russia.
This is the exact opposite of our situation.
We have political stability and an overall comparatively pretty good system and our problem is a surplus of ‘Capital inflow’

I don’t think this index can be used to predict house price movements at the present time and here is why:

The index measures intent to buy and pay more based on “rent vs. buy” decisions (repayment vs. rent), with capital gains considerations being secondary.
This kind of decision making was dominant in the past. Prices were ultimately driven by new entrants’ decisions to pay more for mortgage vs. rent.

Index seems to be working well when few assumptions are true:
– people have the ability to borrow much above current prices. This can be the case in few instances: prices are not high relative to income, people have significant savings or credit is completely loose and banks allow people to borrow as much as they want
– home prices have room to move up significantly without danger of becoming prohibitively expensive for new market entrants
– IR are not expected to rise significantly during the period long enough to make repayments low compared to income (inflation factor)

What we witness at present is market completely overtaken by investors. New market entrants are pushed out of market or will be if prices rise 10 or 20%. Low rental yields are being perceived as good by many investors (NG fairy-tale), rates are at record lows with very little room down. Income growth (inflation) at record lows with very little prospect of repayments falling as percentage of disposable income especially for younger couples planning to have children (loss of one income, child care, …).
Current market seems to be different place, place where old rules do not work, … and it is different. We are in the middle of huge housing bubble where everything is driven by greed, shame and fear. At the moment it’s greed that rules, but quickly fear may take over.

Trying to find a rational explanation for irrational market behavior seems to be fruitless. Economist should focus their time to figure out what to do once fear takes over and game ends.

Its not a market anymore its a ponzi scheme. Trying to find a rational explanation for a ponzi scheme…. well… I have a super super rare, stained rose Tulip bulb I’m trying to get give to a good home… for a small (read substantial) contribution to the ponzi

The rational explanation within the mind of the participant is “this is growing, therefore it is sustainable”. The practicalities and realities of the ponzi itself become irrelevant at that point and rhetoric subsumes reason.

It’s sad how much effort is being wasted to study rational reasoning behind irrational ponzi behaviour and very little was put into study of psychology behind.

In my (unprofessional) opinion, shame plays much more important role than greed at this stage of ponzi development in Australia. The greed driven participants entered the game long time ago, but peer pressure and “property investing” environment is putting to shame all the people who are failing to make millions by following simple home flipping strategies of their peers.

I can only imagine pressure inside the head of a person whose underachieving friends already have 5 IPs that will soon make them millionaires.

Sad truth is that these shame driven late entrants will suffer the most once bubble bursts.

If real IR stay below zero and we don’t get deflation, there are other inflation proof assets that are much more liquid than houses.

I personally don’t believe the ‘low rates are here to stay’ mantra. In economies that are actually growing (us, oz, NOT Japan) the distortions caused by ZIRP will be its undoing; rates will rise in the medium term.

Japan can safely run ZIRP as long as its population is shrinking; every year, less money is spent in Japan because of oldies dropping dead. This is not the case for the US and oz.

“shame plays much more important role than greed”
Eyes downcast! Shuffles feet and heads towards the corner!

Re Japan – After multi-decades of CAS Japan is now starting to run a steady and increasing CAD. Difficult to see how it plays out but, unless they have massive capital repatriation, the yen falls substantially and the growing germ of inflation bloosoms into a full blossoming plant – with blooms!
Are investors likely to repatriate capital into a falling yen? Perhaps if all Japanese domestic asets become dirt cheap!

At this point all I give a s**t about is finding a way to convey the concept that shelter is an important, no – critical, part of human survival.

Financialise those houses, yes, don’t view it as an integral aspect of social function. Or survival itself.

Seriously treating real estate as a commodity in the first place as opposed to the prime purpose of sheltering the populace is starting to drive me a bit crazy.

Either I’m crazy for thinking that housing is a necessity or society is crazy for placing *egregious monetary* value into something that ultimately doesn’t really produce anything, it functions primarily as a domicile.

“- home prices have room to move up significantly without danger of becoming prohibitively expensive for new market entrants”

Isn’t really the case at all. The new market entrants aren’t significant in any regard (to the market) other than being the minimum base point at which “investment” can occur. They do not have to be new entrants, just “borrowers”, be they speculative investors or otherwise. Essentially it can be summed up to this: “(so long as)… people have the ability to borrow”

Really because I accidentally flipped to channel 9’s breakfast show and apparently I am wrong about the obvious boat-like momentum of economies. I must live in the NOW. Because planning for the future is for squirrels, not humans.

Was going to ramble for a bit, instead I’m just going to go read more spruiking from hotspotting.

Re squirrels
A few years ago my ex gave me a birthday card. Front showed a squirrel lying on a psychiatrists couch talking to psychiatrist. He (she?)says
“It was when I learned that you are what you eat. I knew I was nuts!”

Hi Anu, I’m with you on this….Lindsay David’s book “Australia boom to bust” is well worth a read. It was released a few months back. I am reading it and even he cannot grasp this Sydney maddness.
@ doctorx, great observations in your post above, I like what you state in the last 2 paragraphs.

“Either I’m crazy for thinking that housing is a necessity or society is crazy for placing *egregious monetary*…”

At the risk of sounding like a communist, if I was part of the ruling class I would see property as a prefect way of controlling people. If you can convince the masses that they must own a home (at almost any cost) then there are multiple benefits for you and your brethren:

1) On a simple level your property portfolio skyrockets, but this is really just a happy side benefit.

2) Importantly, people will need to work more hours and work harder to pay off their massive mortgages (this counters any crazy idea workers might have that they can work less and enjoy life).

3) Workers also tend to think they’re richer than they are, so they borrow and spend more than they otherwise would.

With real growth in the developed world getting harder to come by, the ponzification of the housing market has been a massive lifeboat.

“Honestly basic philosophy and economics should be taught in schools from a young age, it’d be so threatening to any perceived global order.”

Of course, but it’s not really in the government’s interest to have a public with critical thinking skills or economic knowledge! We need compliant (albeit skilled) workers and consumers, not critical thinkers. And that is exactly what schools pump out!

Ah Mig, This slavery thing is not as silly as it sounds. Australia was built on slaves and slavery and the goal of the elite is to return to that master servant relationship. it just makes things so much easier when you dont have to worry about the underclass WW

“it just makes things so much easier when you dont have to worry about the underclass .”

Yep, it’s nothing new, it’s just more insidious and effective than in the past. I mean if you can find a means to get people to voluntarily do what you want them to do (e.g work harder and longer, spend more and generally be good little pro capitalist actors) while actually believing they’re prefectly free, then that is the best form of control there is. It’s what I would do in their position (you know, if I was eviler and had power to lose).

+1 classic authoritarian conservatism (many British friends view Oz as very authoritarian/macho), and maybe most important manifestation is in the work place, private and public, with nervous baby boomer bosses.

To get ahead whether renew employment contracts or gain promotions depends upon being a ‘family unit’, have mortgage, AFL/NRL team and not in a union…… fast moving news cycle, no time for reflection, neither time for analysis nor being empowered…… except elections…. where one can vote for or aginst candidates/parties which are very slightly different…… who themselves are manipulated to by the Oz sporting obsession, i.e. opinion polls and bubble of baby boomers and oldies fighting to conserve their advantages and benefits

Aside from the good points you have made the other issue is that investment in productive assets has withered in Australia as investment has gone into property – up to 60% of national assets are now property – UK is 20% and US 14%, if I recall correctly. On top of that over 50% of the economy is finance based.

Our current and very dumb politicians seem to think by magic new industries will suddenly pop up to take up the slack – they won’t.

What happens when the economy goes negative? Could be very interesting.

This massive underinvestment in productive assets is the thing that really worries me. It seems to me that at some point, the housing market (and incomes) could implode to restore the ratio to the 14-20% figures seen elsewhere.

I am curious of the source for these figures, as the imbalance seems so great as to be almost unbelievable.

Based on the last 3 mining booms, the top will come 2017. Property seems to top out about 4 years post the mining top. Considering the mass calls for more rate cuts, the fruitless banking and foreign buying inquiries which might actually increase speculative fervour, it’s looking pretty likely once again.

Younger people in this country have to become more politicised, especially in the Senate where it is obviously extremely easy to win a seat with a relatively small number of votes, and where power is more easily wielded.
At 63 years of age, I will vote for anyone that will bring down the ridiculous housing prices in our capital cities so that my children can afford to be housed.

My children come a million miles before anyone elses and so should yours.

That’s where we’ve got it so wrong in the western world. We think we’re being so zen looking out for everyone else while destroying our own kids futures. Every species on the planet look out for their own young except for dumb western humans.

This horrible individualistic attitude of “mine comes first!” is so socially harmful it beggars belief. Children do not choose their circumstances, they are born into them, they must all be provided (well, all citizens) with the most equitable possible slate for success and happiness.

Honestly the “western world” has it wrong: “What’s in it for me?”, “How can I look out for myself and ‘my own?'”.

Honestly at this point it is hard to tell whether what you wrote is sarcasm or just self absorbtion.*

It isn’t about being wonderful athalone it is about building an inclusive society. “Inclusive” is not synonymous with some ridiculous utopian ideal so don’t get confused on that count.

Hi Anu,
Socialism is what has ruined the Western world.
If people took their responsibilities seriously, to look after their family’s welfare, all our problems would be small ones.
You seem to have the attitude that the government, that is the taxpayer, will take care of everything.

That’s where we’ve got it so wrong in the western world. We think we’re being so zen looking out for everyone else while destroying our own kids futures. Every species on the planet look out for their own young except for dumb western humans.

You’re delusional.

The Western World has spent the last thirty years glorifying selfishness, greed and the individual. We have built a society with a philosophy of “me want, and fuck you”, to the detriment of nearly everyone.

If you mean some textbook idea of “socialism” that exists nowhere except the fevered imaginations of right-wing wackos, then it’s just stupid.

If you mean the social democracy idea of “socialism” that provides things like public healthcare, education, welfare, safety regulations, laws protecting workers, and the like, then “socialism” is practically what _defines_ western society.

If people took their responsibilities seriously, to look after their family’s welfare, all our problems would be small ones.

Easy to say when you have had the means to do so ready at hand your entire life.

Hard to do when you don’t have the opportunity from the get-go.

You seem to have the attitude that the government, that is the taxpayer, will take care of everything.

I’m saying the left are “That’s where we’ve got it so wrong in the western world. We think we’re being so zen looking out for everyone else while destroying our own kids futures. Every species on the planet look out for their own young except for dumb western humans.”

While the right are “The Western World has spent the last thirty years glorifying selfishness, greed and the individual. We have built a society with a philosophy of “me want, and fuck you”, to the detriment of nearly everyone.”

Last time I checked athalone the government is the organ of the people, the organising, guiding force for general social and economic doctrines.
“Hi Anu,
Socialism is what has ruined the Western world.
If people took their responsibilities seriously, to look after their family’s welfare, all our problems would be small ones.
You seem to have the attitude that the government, that is the taxpayer, will take care of everything.”

Nice straw man of sorts there, for where was it implied beyond all doubt that “the government will take care of everything”? Every individual has a responsibility to society, not the other way around.

Honestly the rise in individualism “I want, without responsibility!” is ridiculous, just as giving an individual or group something and expecting absolutely nothing in return is ridiculous. One breeds a selfish culture the other breeds a culture of entitlement. Both foster a disconnect from society on the level of responsibility.

As far as population goes on what do you base this “we can’t look after them?”

Rhetoric does not form any reasonable substitute for logic.

“So you obviously don’t believe that completely cutting out all overseas buyers and wiping out negative gearing will make any difference to house prices?”

Oh my god, so fallacious arguments are the order of the day are they? Sorry I don’t waste time with those, they’re unproductive and end in boring circular arguments that get nowhere.

“If people took their responsibilities seriously, to look after their family’s welfare, all our problems would be small ones.”

History shows all modern societies and economies have stumbled from one economic crisis to another. We’re a flawed species and our markets and societies merely reflect that. That’s where neoclassical economics, communism and many other economic theories fall down. They just don’t understand the complexity and confounding nature of human behaviour.

I’m saying the left are “That’s where we’ve got it so wrong in the western world. We think we’re being so zen looking out for everyone else while destroying our own kids futures. Every species on the planet look out for their own young except for dumb western humans.”

And you’re wrong, for reasons that have been covered at length previously.

Have you come to grips with your desire to dramatically reduce global population requiring violent and oppressive means, yet ?

“Looking after infinite number of people is beyond ridiculous. It is so illogical that mental illness must be a precursor to left wing nutters.”

Ok, there is maybe a little truth to the last part of your comment, but I would have thought you’d find us lefties more sceptical of population growth (and its costs) than right-wingers. I’m generalising, but I would assume more good right-wingers would believe the market will ultimately provide solutions to all our social and environmental problems. Love that invisible hand!

“Have you come to grips with your desire to dramatically reduce global population requiring violent and oppressive means, yet ?”

There are a lot of complex social and economic problems in the developed and developing world, but at a minimum we (in the developed world) could stop incentivising domestic population growth. But that would be bad for our flawed economic system (see Japan), so that is not going to happen.

At any rate, like all species that overshoot their limits, nature will deal with us at some point. From a selfish point of view I just hope it’s not in my lifetime!

“I cannot even fathom how you reach such a completely arse-about-face conclusion as “left wing nutters” are in favour of an “infinite number of people”.”

Left wing just want to help everyone at the expense of the rest of us. They’re delusional. I have never heard of a number that Australia should take. Do you have one?

“Have you come to grips with your desire to dramatically reduce global population requiring violent and oppressive means, yet ?”

Nowhere near as violent and oppressive of doing nothing. As usual left wing have ignored or missed most of the issue.

You speak as though you convinced me of something or presented an argument that was superior. Far from reality. Any intelligent person knows population has to be controlled or it will lead to more pain. Do gooder lefties are beyond ridiculous.

You speak as though you convinced me of something or presented an argument that was superior.

I hold no illusions I could convince a single issue true believer like you of anything.

However, I have pointed out on numberous occasions why your reasoning is wrong, your arguments fallacious and why blaming it on “the left” is absurd when it’s the side of politics that *isn’t* actively pursuing unthinking, unsustainable growth and consumption.

Any intelligent person knows population has to be controlled or it will lead to more pain.

Intelligent people realise the only way to rapidly and significantly reduce population is some combination of a) withhold help to those who need it so they die off sooner b) forcibly prevent them reproducing and c) actively killing them.

Desist with this divisive “your generation” nonsense, it only serves a disunifying purpose. It isn’t some absurd intergenerational war and never has been. Using such language only serves to fragment, not unify.

House prices are not coming down because the politicians and corporations manipulate a dumb electorate.

“foreigners typically buy expensive houses, therefore they don’t effect FHB and most other Australian buyers”.

Take 2% out of the market (no matter which tier) and it won’t have any difference is so mind numbingly deceptive. I’m embarrassed to be be part of this dumb country. A democracy that’s voting for destruction.

The chart/indicator isn’t quite right. Need to look at the net rental yield – not gross. Note that across all households, the rental yield net of ownership costs and interest charges is actually negative. It has been negative for a few years – but the last few years are very exceptional by historical standards. Of course, negative gearing is the driver of negative net rental yields – but a big enough rise in the unemployment rate would send the shudders through this complex.

Meanwhile between 1 and 2% of property is being bought by foreigners (some deceptive liars say has no effect on FHB’s because foreigners are buying a different tier) while the population grows at nearly 2%.

That means up to 4% of the housing stock is TAKEN from existing Australians.

Property owners and their FIRE brigade dictate what happens in Australia.

The voters (customers) get to use property (rent) subject to their preferences and financial ability and can work as hard as they like to earn that financial ability to afford their preference based on the rules set by the owners (shareholders / Property owners and their board)

But the way urban land markets can be distorted, it is possible for house size and quality to be improving even as real prices remain stable; and for size and quality to be declining even as real prices increase. The latter is the trend forever once you start rationing the supply of land for urban growth – the UK is the exemplar of “6 decades on” with this approach.

Sure it exists in Sydney and Melbourne with yields of 2%, but look at coastal regional NSW. Quite reasonable prices at good yields at reasonable ratios rent/repayments/wages. To me, they seem to be on par with global prices.

Although that doesn’t detract from the fact houses are obscenely expensive and by extension socially harmful and economically harmful.

No incentive to raise a family if you’re in a permanent rent-trap with no sense of security. Even if you do, that’s a terrible set of circumstances and stresses to raise a family in. Harder to spend money on actual consumables when wealth is funnelled away via mortgage repayments.

Sure it exists in Sydney and Melbourne with yields of 2%, but look at coastal regional NSW. Quite reasonable prices at good yields at reasonable ratios rent/repayments/wages. To me, they seem to be on par with global prices.

I don’t mind houses in Vaucluse or Point Piper being the most expensive in the world (if our rich class is willing to pay $100m for a house let it be) my problem is that normal people cannot afford to buy even in the cheapest suburbs like Campbelltown 50km from the city – median house price there is $400k or almost 6 times dual minimum wage income (more than 15% of population earns minimum wage)

“I don’t mind houses in Vaucluse or Point Piper being the most expensive in the world (if our rich class is willing to pay $100m for a house let it be)”
Doc that rich class is created in Sydney by parasitising the rest of Australia. It is part of the problem.

The $100m houses are being bid up by foreigners. They’re only worth $20m if only Australians were bidding. So then the Australians that should have paid $20m for the best pay it in the burbs and so on. Foreign buying IN ALL TIERS is fucking us all over.

I used to be concerned about Aussie housing affordability but a while back I came the the conclusion that the real problem was not with RE but rather with the dearth of high quality / reasonably priced Aussie investment alternatives.

The movement away from Aussie RE wont happen till investors realize there are better ways to invest their scarce dollars. Unfortunately at the moment there are no better ways to invest so RE to the moon…eventually one would hope to see Aussie entrepreneurs just give up on house ownership and instead focus all their skills and capital on building tomorrows great companies. Investing theory tells us that all businesses with great cash flow and good margins must eventually find to their correct valuation in the market…its really just a matter of time.

That’s why I believe that Aussie RE overvaluation is just a symptom…the true malady lies deeper within our society/economy, it starts with a massive failure to properly develop our human capital and culminates in our terrible treatment of Aussie entrepreneurs (look no further than our ridiculous tax rules).

In a globalised world that could mean the worlds millionaires (millions of them) want to own a bit of Australia. We’re not going to work out that globalisation is hurting us until Australia is entirely destroyed and Australian lifestyles are shattered.

I couldn’t agree more, Everyone that worships at the altar of isolationism should immediately bolt their the doors shut and proceed post haste to the nearest beach where they can bury their heads as deeply as possible. Its the only way they’ll survive

Lets see: Can any globally unproductive economy possibly control what happens to it over the long term?
That’s an interesting question, I dont think they can, maybe they can control through legislation what happens next week, or next year but when you look 10 years out things look a little less certain. Fifty years out it’ll be a different world with different care about’s and different geopoltics…

now the $60K is : Will that world of the future continue to respect your isolationist decision? Maybe they’ll decide to just take what they want without involving or enriching future Australians.
If you need an example look no further then Freeport-McMoRan, how did this two bit company ever take control of such valuable Indonesian assets?

I thinks its more than that CB, the dollars available for investment all belong to the retired or retiring class and all they want is passive income – so search for yield. They have no appetite to bring something new into the world, an established business where the dividend/capital growth is enough to compete on yield they’d go for – but a new enterprise in a new industry? No chance. KKR would be your best bet then.

I know it’s an easy throw away line, but I really I think some of the wages at the upper end probably need to fall a bit. I think they’ve gamed the system to line their own pockets while claiming it is the market at work.

“I used to be concerned about Aussie housing affordability but a while back I came the the conclusion that the real problem was not with RE but rather with the dearth of high quality / reasonably priced Aussie investment alternatives.”

Well when there is a lack of productive investment choices (for whatever reason, lack of direction, insufficient future demand in predictions) and considerable capital it gets pumped into unproductive investments (creating really stupid asset bubbles), so this is not really any surprise.

Property, (well, land) is the worst to inflate as it just pushes up the cost of establishing productive enterprise, not to mention the ridiculous social costs and poor utilisation of capital from paying off retardedly large mortgages.

@Anu No argument from me, but the solution must start with excess capital (both human and financial) seeking out alternate investments, not the other way around. Maybe the precursor to this change will be a period of negative RE yields accompanied with RE price collapse however I wouldn’t wish for RE collapse until we’ve at least made the structural repairs needed for individual Australians and their local companies to be globally productive.

This change must start with us demanding excellence from our high school and tertiary education systems.

Well CB that’s the much vaulted “slow melt”: an orderly rotation of investment dollars out of speculative RE portfolios and into productive industries servicing export and export facing sectors of the economy.

Good luck with any of that of course, what could we possible export that the world wants at this stage of the game? The only thing I can think of is QE…

Well you can just change policy to reflect housing as necessity and prevent the financialisation of houses (god I hate typing that word) although it isn’t very palatable to tell a massive swath of the population what to do, especially when it doesn’t appear to work in their own best interests.

“I wouldn’t wish for RE collapse until we’ve at least made the structural repairs needed for individual Australians and their local companies to be globally productive*. This change must start with us demanding excellence from our high school and tertiary education systems.”

This is very true, especially, ESPECIALLY the last line. Education leads to opportunity, not to mention self and social improvement.

No actually I’m not convinced that competitive is the right word it implies to much of a race to the bottom and IMHO lower Aussie wages is not the right way to win. Greater Productivity means we can maintain our standard of living and still be winners in the global market place.

Australia’s uniqueness provides us with lots of opportunity to create specialized companies that are global world leaders. so we dont need to fight (compete) so our parents companies can hang on for one more year, @#$% that invest in new businesses that own new sectors and therefore command high margins. This is how modern manufacturing creates Productivity.

How is that any different to me borrowing money to create a new company that may or may not be productive? In both cases the capital lender takes a risk and is rewarded with interest. If you’re suggesting there is no risk in Sydney Re… well lets just say I disagree….however ultimately I dare say the real risk will be passed on to those that are not part of the TBTF banking/RE scheme. See what happened in Ireland and Argentina.

@8888
These are all great reasons why the most productive elements of our society (gen X/Yers) should flick us old boomers the bird, and proceed to develop their own enterprises. forget about buying our structurally flawed over priced assets (stocks, Re, whatever). Instead they should invest in themselves, they should demand better education (maybe free tertiary education like their parents), demand fairer tax treatment especially for newly formed high growth companies. Unfortunately most gen X/Yers have been fatally bitten by the RE bug meaning there’s little hope for them and therefore no hope for us.

I totally agree with you China Bob – but the boomers are brainwashing their kids into borrowing enormous sums of money to buy non-productive assets.

Very few people have entrepreneurial spirit ingrained. Many just want to do their 8 hour day and get home to watch TV.

I left Australia because despite earning good dollars it was impossible to get ahead maintaining a decent lifestyle – with a child – under Australia’s tax scales, cost of living and property prices.

Setting up a business in Australia is a regulatory nightmare. I have recently openly laughed at Australian lawyers asking for $50,000+ to generate fill out some templates to lodge at ASIC.

Your advice is spot on.

Invest in yourself, start a business, forget buying assets with 2% returns – but I would probably add – get the hell out of the place if you can.

You aren’t going to get any value for money for the rude taxes and overheads that will apply to your business/profits. Oh and democracy isn’t going to work until the boomers start dying off and cease dominating as a voting bloc.

@China-Bob. It’s not as if we’re filling Australia with talented soldiers that will protect us.

There’s no sense in populating. While the US is the world power, that’s a democracy, we’ll be okay. We’ve done more to damage that power than most countries. Australia, despite what you’ve said, could not have played this worse.

Madness.
It means that when the food boom for the growing Asian middle classes finally arrives, most of the farm and processing profits will go back overseas, like they do with mining. And to top it off, we won’t even be getting the benefit of the (few) jobs as farm hands because under the free trade agreement with China etc, they’ll be bringing in migrant workers. We’re just going to be the trash of Asia living on the dole in the outer suburbs. Australia is becoming one really ugly place fast.

The property next to mine is a prime cattle and sheep farm, 5000ha with large dams (4 mega-litres) plus around 4 km river frontage. There have been many Chinese groups visit the property over the last 12 months who have all complained that the property is not green enough.

I get a chuckle everytime I hear this. My wife is Chinese and asked where they bought and why – Tasmania – it looks nice and green. The expectations are they can make 15-20% return on the farm. In our area, land value has increased maybe 4% over the last 5 years. We work on a net return of around 4-5% per annum on the farm given we are diversified and export direct to China. Others are getting around 2-3%.

The majority of the farm buyers we are seeing are Steel mill owners, coal miners and manufacturers. They have no clue on farming and do not engage local ag experts to assist, depending on local Chinese to locate properties.

This is going to end in tears – if they do not employ sustainable ag techniques, they will destroy the land and water resources. This is my main concern – not the sale to the Chinese but the loss of the production from this land due to mis-management.

Well in that case we’re even going to miss out even on the pretence of an Asian driven food boom by buggering up the ag sector with foreign ignorance and imported workers.

I’m not blaming the farmers for selling out, they’re being screwed by the big end of town, as Bernard points out. But they still vote for the frigging Nationals !!!! who are nothing more than patsies for the Big End of Town party, those frigging filthy, traitorous Judases, the Libs. Vote independent or small parties and ditch those worthless National bitches countrymen !

My Grandfather sold out to a Japanese ag company in early ’80’s for a grand sum at the time. After 6 years, my Uncle bought the entire farm back along with 4 ajoining lots for half of what we sold the original for. I am patient and can see the same thing happening this time around as well. In the meantime, I have a couple of good international businesses and a drawer full of cash ready for that day.

Good to hear Cow. Hopefully the land and water are not too buggered up. But somehow I don’t think it’s going to be a straight forward replay of the Japanese bubble in the 80s; that was mostly a financial thing and by and large, they got locals to keep running the operations. The Chinese are different, I think they’ll just either hold on or sell to family or connections. They’re thinking long term.

This is going to end in tears – if they do not employ sustainable ag techniques, they will destroy the land and water resources.

That’s OK, because the magic invisible hand of the market will step in and put them out of business. Then someone competent will take over and it’ll be up and running again shortly thereafter producing food.

Because it’s not like there’s any long-term or permanent damage that can happen to resources like land, right ? Right…?

“But they still vote for the frigging Nationals !!!! who are nothing more than patsies for the Big End of Town party, those frigging filthy, traitorous Judases, the Libs. ”

St Jacques – I once, many decades ago, took on the Nationals in a rural area. it was like coming up against the mafia.
A close friend tried a couple of years ago – same result!….But – WATCH THIS SPACE!

As a close follower of dairy farms prices, I do not think this is correct.

Western Victoria was the proposed area for Chinese buying 40 dairy farms (facilitated by Tasmanian hustlers). They did not pay the deposits when due. The latest now is that the hustlers are trying to get USA investors – good luck!

Some really good thoughts in that analysis Cameron. I’ll have a more detailed read later.

Just quickly, have you made any allowance for “debt saturation” We have been in an era of more accessible credit since Keating deregulated banking and since then more people have accessed ever more credit, but there is a limit even at attractive interest rates. Especially currently – no one gets a loan they can’t prove that they have the capacity to meet.

Forgive me if I’ve missed a reference to that but if you have time can you give me your thoughts on that issue?

It’s not a “model”; it’s a simple relative index. You cannot “make allowances” to data that represents the availability of credit (i.e., mortgage rates). If you are suggesting that the index does not sufficiently account for the volume of credit or the money base, then I understand. But that’s a whole different hypothesis: “House price increases are based on the amount of credit sloshing around in the system.” Not at all unique.

“…The renowned stability of the 1950s and 1960s is on display in this metric as well, with housing capitalisation rates very stable compared to yields, with almost no price speculation built into prices. Perhaps this was primarily a product of tight credit to households, coordinated construction efforts, and relatively high levels of non-housing investment…”

No amount of pointing out the elephant in the room to blind man Cameron Murray caressing the trunk or one leg, seems to register.

Don’t just trust me on this – here is Ed Glaeser in “Nation of Gamblers” – 2013:

“……Almost everywhere, prices in 1970 were below 1950 prices plus this construction cost related price increase. Even after the most stupendous change in America’s mortgage history, and a post-war economic boom, housing prices had gone up less than construction costs would warrant.

The natural explanation for the missing boom in prices after World War II is that there was an enormous increase in housing supply over the same time period. During the 1950s, America permitted 11.84 million housing units, which is roughly the same as America permitted during the twenty-six years from 1920 to 1945. The construction was disproportionately on the urban fringe (Jackson, 1979) and disproportionately in the Sunbelt. The post-World War II era demonstrated exactly what textbook economics predicts should happen when robust demand meets relatively elastic supply. Quantities rose and prices stayed relatively flat. The relatively elastic supply owed much to the rise of automobile-based living on the urban fringe, which can be seen as either a shift in housing supply or a change in supply elasticity. For example, in an open-city formulation of the Alonso-Muth-Mills model, with supply costs that increase with density, lower transportation costs will increase supply but not change supply elasticity. Yet it is possible that the automobile made supply more elastic as well. On the urban fringe, lower cost, low density housing can be built in massive quantities, essentially using a constant returns-to-scale technology…

“…The missing post-war price boom is not a problem for conventional economics, but it does present a challenge to those who seek to explain bubbles as the outcomes of a stable process where readily observable exogenous variables translate into the presence of a bubble. The 1950s had easier credit for homeowners than the 1920s and economic conditions were at least as good. Any model that suggests that there is a stable relationship between either of those variables and price bubbles has difficulties with this epoch……”

post war urban sprawl made houses cheaper but not necessarily cost of living in those houses – the total cost of housing that includes new costs related to life in suburbs (like transportation cost) was significantly higher.

By the end of 60s average suburban household needed more than 2 “gas-guzzlers” (30 l/100km) priced at $3k each – or around half of an average house price (average home price remained under $15k).

Average petrol consumption in suburbs was around $400 per car per year (9000 miles @ petrol price $0.35 pg).

Houses prices stayed low because people couldn’t afford to pay more, they had large car loans and for the first time they were spending large percentage of income on transportation

And in the former, the size of housing is Hobson’s-choice tight. People are not so stupid as your ridiculous theory makes them out to be. They make the trade-offs they want: space, location, transport costs. If you allowed Hong Kong to simply grow inland of the mountains with good connections, giving the people western-suburban style housing choices, the people would be far better off than they now are; both for average living space AND “housing plus transport” costs.

Articles like this are enormously inflammatory, aren’t they? The thought that this RE madness could get even worse is so counter-intuitive and enraging, especially if you’re living in a crappy, overpriced rental with a bogan landlord who lucked out by buying it when it was ¼ the price 😡

My advice, which I’ve given to my kids too, is to wait it out. Get out of Oz if you can. Make your homelessness an advantage, not a handicap. See the world. Or travel the whole of Australia (how many here have seen Kakadu, Ayers Rock, Port Douglas, the Nullabor Plain etc?)

Eventually things will revert to the mean. I know it seems like forever, but it will happen. It has to happen.

Bubbles in financial markets have been studied not only through historical evidence, but also through experiments, mathematical and statistical works. Smith, Suchanek and Williams designed a set of experiments in which an asset that gave a dividend with expected value 24 cents at the end of each of 15 periods (and were subsequently worthless) was traded through a computer network. Classical economics would predict that the asset would start trading near $ 3.60 (15 times $ 0.24) and decline by 24 cents each period. They found instead that prices started well below this fundamental value and rose far above the expected return in dividends. The bubble subsequently crashed before the end of the experiment. This laboratory bubble has been repeated hundreds of times in many economics laboratories in the world, with similar results.

And what is this cut and paste from the wonderful Wikpedia supposed to tell us? That bubbles can be modeled? In that case, why are we so pis-poor at predicting and preventing them? Secondly, how this prove the maxim of ‘revert to mean’?

Bubbles, by their very definition, always end. The issue of predicting them and predicting when they end is not relevant here. In simple lab conditions bubbles follow a known trajectory; in the real world there are many confounding factors, but the overall story remains the same.

Not sure what frustration is being vented. The questions I posed are quite straightforward and relevant. If “bubbles” are easily modeled, then their negative consequences can be negated. The point is that the profile of a bubble is not identified until it is no longer a bubble. Wikipedia or not, that observation is consistent.

SO… lets see if i understand the argument – the boom in house prices is… just beginning???

Its a game of Russian roulette.

When it goes this time, there will be no recovery – so this time will be different.

Hey, make hay wile the high prices last!

After that, there will have to be a universal / global form of debt forgiveness for the muppet indebted, or they will resign themselves to their new status as eternal slaves to the banks, the plutocratic elites and the debauched economic parasites running countries.

Hmmmm… I wonder which scenario is more likely?

Continued oppression? or…
the sudden enlightenment (of the oppressors, and subsequent debt forgiveness)

Ah, yes…property; any class of property. It has the potential to store up stress for a long time…then…Boom….

“While banks are reluctant to release figures, there’s growing concern that Australia is in the grip of a rural financial crisis as hundreds of farms fall at the hands of banks. For some producers in parts of the country, property prices have slumped so dramatically that their debt is higher than the value of their farms…..(The ANZ) came with an offer and basically said, “Sign this or we’ll default you.” Well we didn’t sign it and – we didn’t sign it and so what they did is defaulted us….. I don’t want what’s happened to me happening to my kids and your – you know, anyone. It’s wrong. It’s wrong. ”

were you listening to MacroBusiness when they were making it clear that the best policy was to avoid/dump/short coal, iron ore and energy and resources generally?. Miss the shorts of the century? As for the banks, first there will need to be an unmistakable crisis in housing. Be very patient. You can count on Australia’s banksters’ minion of a government to do everything in its power to interfer with the market correcting the housing bubble, even at the cost of massive long term structural damage to the economy. Be patient and look for other opportunities in the meantime.

It’s not just ‘us’!
In 1978 it cost a median American household 100% of its income to buy/finance the median house; $30,000 income to purchase a $30,000 house.
In 1988 it was 200%…still a doable $35,000 to put your name on a $70,000 home
1998? 300%.
In 2008 it was an economy numbing….450%….
And where are they at today, after all the financial pain and deleveraging that’s gone on? 550%.
The difference over all those years has been access to ever cheaper debt versus stagnating household income. We all know that. I had hoped that a mere 6 years since the near-death property inspired financial markets experience, a chastened the USA; the World would be wary of debt-fueled property risk.
Apparently, that’s not the case……And the USA is conservative in comparison to Australasian property markets.

Does Phillip Soos take into account the differeing impact of landtax on net yields at different gross yields?

NSW Land Tax is $432,000 exempt then $100 plus 1.6% up to the premium threshold of $2,641,000 wher it becomes $35,444 for the first $2,641,000 then 2% over that.

If you own a rental property portfolio of $3M with 33.3% UCV and a gross of 2.0% then land tax is taking 15% of your gross and at 50% expense ratio, 30% of your net. If the gross was 4.5% and expenses the same as before ($30,000) then land tax takes only 8.5%

Land tax has a dramatic effect on net yields on large investment portfolios at low yields unless the tenant has to pay the land tax (which is commonly the case in commercial leases, but not in residential where the vast majority of mums and dads have their investments.

“…I would not be buying a home right now. I would exercise the option to wait until the Reserve Bank of Australia gathers the gumption to restore borrowing rates to “normal” levels (that is a cash rate of about 4 per cent), which might not be for a year or two.

I’m confident that house prices will continue ballooning at a pace above wages growth (say 6 per cent to 8 per cent annualised) until the RBA hikes – and even more convinced that there will be a 10 per cent-plus correction, after which residential property returns will under-club inflation for a period of time.

Any gains made before the correction will probably be given back, and after interest repayments and heinous costs (stamp duty, agents’ fees, maintenance, land tax, etc), buyers may have lost money. ”

MB Fund

* Inception returns are per annum. The above returns include trading and investment costs but not administration fees. Note individual client performance will vary based on the amount invested, ethical overlays and the date of purchase. Past performance is not an indication of future performance.